Profits and earning claims were deceptive, agency alleges

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In a record-setting financial settlement, a home-based computer business opportunity firm has agreed to pay $5 million in redress to settle Federal Trade Commission charges that the firms ad claims about potential earnings and profits were false and misleading. In addition to the financial settlement, Computer Business Services, Inc. (CBSI), would be barred in the future from misrepresenting the success rates or profitability of its clients and from using deceptive testimonials or other deceptive statements to entice consumers to buy its products and would be required to disclose that federal laws restrict the use of certain automatic telephone dialing systems it sells.

CBSI ads touted its “turnkey” business opportunity -- a collection of computer hardware and software that cost investors between $3,000 and $16,000 -- claiming investors could “Earn $4000 Per Month From Your Home With A Computer!” In fact, according to the FTC complaint detailing the charges, the vast majority of investors never earn $4,000 a month and never even earn $4,000 over the duration of their business. In fact, “. . . it is rare for CBSI Center Owners to recoup even their initial investments,” the complaint says. The claims appeared in magazines, newspapers, and postcards, and also appeared on commercial online services, including CompuServe and America Online. The deceptive claims were amplified in information packets mailed to those who responded to the ads, the FTC alleged. Since 1991, the firm has sold its products to approximately 15,000 consumers.

“This is a significant settlement that reflects the significant difficulties of overstated business opportunities promising sky-high earnings,” said Jodie Bernstein, Director of the FTC’s Bureau of Consumer Protection. “?Downsizing,’ ?right-sizing,’ ?streamlining,’ and plain old layoffs in business, industry and government have created a large pool of people with a little money and an interest in becoming independent entrepreneurs. Companies that appear to guarantee income from business opportunities prey on those people and countless others,” she said. “Tens of thousands of consumers invest in schemes like this one and lose their money -- 15,000 invested in this one, alone. Some invest their life savings -- some borrow money in the belief that they can take charge of their economic destiny and make money independently. All too often, money’s being made -- unfortunately not by the investors.”

CBSI marketed computer hardware and more than 40 different software programs that it claimed investors -- called CBSI “Center Owners” --could use to sell services to businesses and individual consumers in their communities. The services ranged from computerized monitoring for seniors and latchkey children to voice mail service. According to the FTC complaint, CBSI ads and marketing material carried claims such as:

“Each one of the programs. . .provides a needed service to the people or organizations in your community. Each program is a proven money-maker, and is now being operated successfully by our present center owners”;

“We right now have 30 services you can perform. We have thousands of center owners already earning good money”;

“Our programs really work, and you can earn more money than you ever dreamed possible if you will work our programs”; and,

“Each of these services is a proven money-maker in large cities, small towns and rural communities throughout the country.”

Through such claims, CBSI represents that “Center Owners” ordinarily operate profitable businesses out of their own homes. In fact, the FTC alleged, CBSI Center Owners do not ordinarily operate profitable business and it is rare for them to recoup even their initial average investment of approximately $9,000. Contrary to ad claims that Center Owners can earn substantial income and can reasonably expect to achieve a specific level of earnings, such as $4,000 per month, investors can’t expect to earn substantial income and the vast majority never earn $4,000 per month or $4,000 over the entire duration of their business. The claims also are deceptive, according to the complaint, because the company did not have substantiation for the earnings claims.

CBSI also used marketing materials that displayed endorsements by purported center owners to suggest that ordinary consumers could successfully start up and operate their own home-based businesses with CBSI hardware and software. The endorsements touted high income from businesses using CBSI products. In fact, according to the FTC complaint, the endorsements don’t reflect those Center Owners’ actual experience, and don’t reflect the typical experience of investors who have attempted to use CBSI’s products or services. Therefore, the claims are false or misleading.

The FTC complaint also alleges that promotional material for an automatic telephone dialing system CBSI sold Center Owners for unattended pre-recorded outbound sales pitches failed to disclose that federal law prohibits use of the system in unattended mode for unsolicited advertisement without the prior approval of the party being called. Because this fact would have been material to consumers’ decisions about whether to purchase the system, the failure to disclose the information is deceptive, the complaint says.

To settle the FTC charges, Sheridan, Indiana-based CBSI and three of its principals, Andrew L. Douglass, Matthew R. Douglass and Peter B. Douglass would pay consumer redress of $5 million -- the largest FTC consumer redress settlement obtained prior to the filing of an administrative or court complaint. In addition, the settlement would bar them from misrepresenting the earnings or success rate of investors; the existence of a market for their products or services; the amount of time it would take investors to recoup their investments, and also would prohibit them from making any representation about the performance, benefits, efficacy or success rate of any product or service unless they possess reliable evidence to substantiate the claims. The settlement also would prohibit the use of misleading testimonials or endorsements and require that ads for automatic telephone dialing systems disclose federal restrictions on their use.

The Commission vote to accept the proposed consent agreement was 5-0. The proposed consent agreement will be published in the Federal Register shortly and will be subject to public comment for 60 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580. This matter was handled by the FTC’s Chicago Regional Office.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $10,000.

Copies of the complaint and consent are available from the FTC’s Public Reference Branch, Room 130, at the address listed above; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC’s World Wide Web site at: http://www.ftc.gov